IRD releases its revised view on New Zealand’s tax residency rules

The Inland Revenue has recently released a draft interpretation statement setting out their current interpretation of the tax residency rules for individuals, companies and trusts. The statement is intended to update the Department’s published views in a June 1989 Public Information Bulletin (PIB no. 180) on the issues to reflect changes in the tax legislation, case law and the Commissioner’s views, since that time.

The statement is open for public consultation until 31 January 2013.

The most notable changes included in the statement are in respect of the residency of individuals. Our article below discusses these amendments, as well as those relating to the residency of companies.

Residency of individuals

Should the statement be finalised, the major changes included within the statement may result in an increase in the number of individuals leaving New Zealand being considered to have remained tax resident of New Zealand.

This is because of the following key changes:

The statement places significantly greater emphasis on the availability of a dwelling in considering where a permanent place of abode (“PPOA”) has been maintained; and

The statement re-examines the application of the residency tie-breaker tests under the double tax agreements between New Zealand and other countries.

Key issues

Though the statement has retained much of the original content outlined in PIB 180, there are some significant changes to the definition of some key principles which are used to consider an individual’s tax residency and which may now result in an individual maintaining tax resident status in New Zealand.

The most significant changes are outlined below.

Permanent place of abode (“PPOA”)

To determine whether an individual maintains a PPOA in New Zealand, several factors should be examined as a whole, including (but not limited to) whether an individual has a dwelling available for their use in New Zealand. The statement suggests that significantly greater emphasis should be placed on the availability of a dwelling.

The statement has suggested that in order for an individual to have a PPOA in New Zealand, they must first have a particular place of abode. An “available dwelling” could include a New Zealand property which has been rented out under a periodic tenancy or a short-term fixed tenancy; or the home of a parent, friend or relative. It does not need to be readily or exclusively available to the individual at all times, but available to them whenever the person requires it.

This change will likely impact many expatriates who have retained a property in New Zealand but leased it to tenants. For the purposes of the statement, this (in addition to other social and economic factors) may mean that they will have retained a PPOA in New Zealand.

Double tax agreement tie-breaker tests

The statement examines the definitions of many terms within the residency articles of New Zealand’s many double tax agreements (“DTAs”).

a) Permanent home - The definition of what constitutes a permanent home has been extended to include a home which, though rented out, may be made available to the owner at short notice. For example, a New Zealand home which is rented out whilst the owner is living outside of New Zealand was previously not considered to be a permanent home for the purposes of the tie-breaker test. In light of this change, the individual may now be considered to have retained a permanent home in New Zealand, subject to the type of the tenancy agreement.

b) Personal and economic relations – personal relations in New Zealand were previously weighted more over economic relations in New Zealand. However, these will now be weighted together on equal basis.

c) Habitual abode – whether an individual has a habitual abode will now be examined in the context of the frequency, duration and regularity of stays in New Zealand which are more than transient.

Implications of the changes

The amendments being suggested to the PPOA and permanent home tests may result in a large number of individuals being considered to have retained tax residence in New Zealand where they might have historically been considered non-resident. This may result in higher tax and administrative costs to employers and individuals where those individuals find themselves in a dual resident position.

Residency of companies

There are no significant changes to the Commissioner’s substantive views regarding the residency of companies from those expressed previously in PIB 180. However, the statement has been updated to reflect changes in the legislative provisions and various taxation regimes since 1989. The notable changes have been briefly discussed below.

Dual residence and the grouping of losses

For a company to make its tax losses available to another group company, it must (amongst other things) either be incorporated or carry on business through a fixed establishment in New Zealand. The draft statement adds a further requirement that the company be treated as resident in New Zealand for the purposes of any applicable double tax agreement (DTA). As such, for losses to be offset, the company must not be liable to income tax in another country on account of its domicile, residence or place of incorporation.

Commentary on obsolete tax provisions and regimes

Various commentary in PIB 180 relating to provisions and regimes that are now obsolete has not been carried forward. For example, discussions relating to the dividend withholding payment regime (since replaced with the non-resident withholding tax regime), the accrual regime (replaced by the financial arrangements rules which generally took effect from 20 May 1999) and the relationship of the residence rules to the controlled foreign company (CFC) regime (the CFC rules were extensively revised for income years beginning on or after 1 July 2009).

Next steps

Submissions on the statement have been invited and should be made by 31 January 2013. EY will be making submission on the proposed changes. Please contact your local EY advisor, or any of the contacts listed below, should you wish to discuss this further.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.